The e hustle 41: The 10 Rules of Wholesale for Ecommerce Brands

This edition of the e hustle is brought to you by Wayflyer: Purpose-built financing for fast growing eCommerce brands.

To sponsor the newsletter, reply to this email.

I Started out with my own wholesale brand over a decade ago.

It was tough. Really tough.

There’s no doubt that you can make money in wholesale, there are just a few things to look out for, if you’re a DTC (direct to consumer) ecommerce brand that’s thinking about taking the plunge into wholesale.

So here are the top 10 things to be careful of, when entering into wholesale, as an ecom brand.

1. Don’t carry excess stock - Indent only

It’s fitting that I start with that rule. Carrying stock in the hope of obtaining future orders is inherently risky. It also goes against everything I talk about, in trying to change your life through having a cash positive business that spins off plenty of cash or dividends for you, the owner.

You can read my previous blog about how to build cash in your business here.

In wholesale, the term indent, refers to your retail buyers having to commit to orders in advance, and then you, the wholesaler, will go and manufacture those orders, and fulfill them. In other words, if I obtain $100k worth of orders for Summer, then I will produce $100k of orders and then deliver them.

The alternative to this is holding stock - some retailers will request a stock service. That means, they want you to hold stock, so that they can order it if and when they choose - basically placing all the risk on you.

Don’t do it.

If you have lead times of say 90 days on your production, and you have to pay your suppliers up front, you need to be paid back in full very quickly to keep your business running. If you have to hold stock, and you find that orders are trickling in over the next 3 months, then you’re going to find it very hard to pay yourself back and grow your bank balance. 3 months to make the order, another 3 months to sell the stock (if you’re lucky) and then another 30 days to get paid (if you’re lucky), you’re looking at 7 months from start to finish. You will absolutely be finding yourself borrowing money.

Sales might look better on paper, but your bank account will be feeling the pain.

2. Do not give payment terms to small retailers

Pretty self explanatory, but never give payment terms to small retailers. The reality is, more than 50% of small businesses fail, and an even greater amount are only just surviving. Why would we provide a line of credit to these businesses, when our suppliers are asking us to pay up front?

That’s bad business.

If you’re getting paid up front, fine, but in no circumstances should you be wearing the risk of your clients - when push comes to shove, a failing business will stand on your shoulders to keep from drowning.

3. Understand your margins

If you’re making a 70% or greater margin on your products (intake margin not gross profit margin - read the difference here) then you can probably afford to wholesale. If your margin is less than that, it’s just not worth it in my opinion.

Retailers are going to ask you for a margin of typically around 50-55% - have a think about how much volume you will need to move to make that actually worthwhile if the margin you are taking home is less than 50%.

Remember to also factor in your operating costs when working out your margins. In other words, if you’re making 40% on a wholesale deal, by the time you factor in your OPEX (operating expenses) which usually sit at around 30-45%, you’re probably not making any profit.

A lot of businesses won’t factor in their OPEX costs in wholesale deals, but this is a mistake. Every business function should be profitable, and stand on its own two feet. You might decide to split your profit and loss statement out by wholesale wages, wholesale rent etc, which is fine. Just factor some costs into your margins, not just the cost of the product.

4. Understand your cash conversion cycle

I wrote about this a little in point 1, but the most important metric in any business is your bank account. If you’re outlying deposits, then paying balances before you receive your products, and then invoicing them on 30, 60 or 90 day payment terms, there’s every chance you’ll run out of cash.
The goal in business is to move stock quickly, why? So you get paid quickly. The goal is not to sell as much as you can order in one year, the goal is to sell out repeatedly, and reorder just in time. Understanding the value in bringing cash in quickly, moving through stock, and then repeating, is so valuable. Don’t be sucked in by sales numbers on paper, they mean nothing. Keep your bank account growing, and stay ahead of the cash conversion cycle. Once you fall into a negative cash cycle, and you prop it up with finance, you’re staring down the barrel of disaster.

5. When they delay - cut them off

One strike and you’re out. If you have a retail client who doesn’t pay on time, get rid of them, or move them to cash before delivery (CBD). With the low margins of wholesale, and the fact you may be providing payment terms to customers, you are constantly walking a tightrope. In this business, you simply cannot afford to prop up slow paying retailers - don’t do it.

6. Consider restricting online sellers

The way paid media (Facebook and Google Ads and so on) work, is that the more competition there is for your products, or brand across ad platforms, the higher the cost per impression, and ultimately the more you pay per click. So your best wholesale customers might also be bidding on your keywords if they sell online (in fact they almost definitely are), which means you will be losing sales to them.

If you quickly Google your brand name, you’ll see who is bidding, or ranking for your brand name. Quite often wholesale brands are outranked on Google, or outspent on Facebook by stores they’re selling to, so your biggest customers also become your biggest competitors, when they sell online.

7. Be wary of going into debt to fund orders
 
There can be a temptation to borrow money, in the hope of being paid back handsomely through wholesale orders. The problem is, if you’re borrowing money as an established business, there’s probably a hole in your bucket. Where is the money going? One sure way to lose money, is to load up on stock, hope to tell it over 3-6 months, at a small margin - you’re going to take a long time to pay yourself back.

Borrowing money to get out of a hole often just makes the hole bigger. Think carefully before taking on debt in a low margin, cash negative cycle business.

8. Consider the market generally

If the retail market is tough, there will be closures, and slow payers. Diversifying your revenue stream through stocking their retail businesses, means that through osmosis, you’ll adopt their problems. In other words, if they don’t make enough money, they cancel orders, or worse, they don’t pay their bills, namely - you.

9. When in trouble keep it simple

I like simple businesses. Focus on your strengths, keep it simple. If wholesale doesn’t feel right, then leave it. There’s been phenomenal growth in ecommerce over the last decade, and there will continue to be over the next decade - there’s no harm in focusing on nailing ecom before you think about other channels that are not exactly booming right now.

10. Read your contracts - especially with majors

You might strike it rich with a deal from a major retailer - until they hit you with rebate requests. Rebates for marketing. Rebates for going on sale. Early payment discounts. The list goes on. Major stores can have complex agreements, including the requirement for a supplier to buy back any stock that doesn’t meet a certain sell through criteria. This can wreak havoc with your cash flow, as you’ll either be banking on receiving a certain amount of money, and actually getting less, or in some cases you will get paid, but then asked to pay a portion of it back.

One of the worst deals I ever entered into was with a department store that had 30+ stores. I supplied a large amount of stock to the stores, who then asked me to credit a large percentage that hadn’t met their sell through criteria. Their reasoning was that I should be happy, as they would spend the credit they received on my next season’s order. Bamboozling. There was one problem with that - no cash. The promise of credits being used on future orders does nothing to improve your business, it just eats into your profit, and your cash, and leaves you with a lot of inventory which you then need to offload - often damaging your brand.

So remember, wholesale can help with things like meeting minimum order quantities from suppliers, building your brand name, and increasing revenue - but none of that matters if it drains your bank account or puts you in debt.

Until next week,

Paul